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The tax impact of the TCJA on estate planning

The enormous changes the Tax Cuts and Jobs Act (TCJA) made to income taxes have gathered the most attention. However, the new law also made necessary changes to gift and estate taxes. While the TCJA didn’t revoke these taxes, for the next several years it did significantly lessen the number of taxpayers who’ll be subject to them. Nevertheless, factoring taxes in your estate planning is still necessary.

Exemption Increases

The TCJA increases the generation-skipping transfer (GST) tax exemption and the joint gift and estate tax exemption, from $5.49 million for 2017 to $11.18 million for 2018.

This amount will continue to be adjusted yearly for inflation through 2025. Absent of further congressional action, however, the exemptions will revert to their 2017 levels (adjusted for inflation) for 2026 and beyond.

The rate is at 40% for all three taxes which is only three percentage points higher than the top income tax rate.

The impact

The majority of taxpayers did not have to worry about federal gift and estate taxes before the TCJA. While the TCJA protects even more taxpayers from these taxes, those with estates roughly in the $6 million to $11 million range (double that for married couples) still need to contemplate potential post-2025 estate tax liability during their estate planning. Although if a taxpayer were to die while the doubled exemption is in effect, their estates would escape estate taxes, they could face such taxes if they live beyond 2025.

If you could be subject to gift and estate taxes after 2025, you may want to contemplate making gifts now to take advantage of the higher exemptions while they’re available.

If you live in a state with an estate tax, factoring taxes into your estate planning is also still important. Many states executed estate taxes at a lower threshold than the federal government even before the TCJA. Now there will be a more considerable difference in some states.

Lastly, back when exemptions rose to $5 million more than 15 years ago, income tax planning, which became more necessary in estate planning, is now an even more critical part of estate planning.

For example, if estate taxes aren’t a concern, holding assets until death may be advantageous. When you gift an esteemed asset, the receiver that takes over your tax basis in the asset could trigger capital gains tax should he or she turn around and sell it. When an esteemed asset is inherited, the inheritor’s basis is “stepped up” to the asset’s fair market value on the death date, erasing the built-in capital gain. So, keeping esteemed assets until death can save significant income tax.

Review your estate plan

Whether you need to be concerned about federal gift and estate taxes or not, creating and regularly reviewing your estate plan is essential. If you’re wondering about the potential tax impact of the TCJA on your estate plan, contact us, and we will answer your questions.